8 Responses to Crude prices

This is really interesting. I just talked to my friend who works at the risk group at an oil refiner and he told me the saudis’ physical positions made a killing off the crude tumble. It really makes ya wonder…

“Can you please elaborate on how they made a killing? What do you mean by “physical” positions?”

Physical markets are where actual commodities are bought and sold at spot prices. I suspect it means that they hedged forward production at prices that are now well above spot, eg, they might have sold (hedged) forward at $110 bbl earlier in the year and are now selling at that price when the spot mkt price is $91 bbl. Pvizzle would need to confirm though.

Can these two supplies go hand and hand as you imply? I do not stay on top of oil markets, but from I have read there is/was a growing gap between sour and sweet crude. Saudis produce sour and their increase in production drove sour crude down while sweet did not move as much – growing gap. Strategic reserves are mostly sweet crude. If Saudis drive heavy crude down in price, but sweet does not move as much, that situation will not be easily transferred into refilling the reserves. It takes years to build refineries, and heavy refineries are few, so a growing gap does consumers of gasoline not as much gain, it just enriches owners of heavy refineries that get to sell their gasoline for same price but input prices are a lot lower.

From what I have seen in reports, I think much of the premium in oil prices is being driven by speculators (there was congressional testimony around 2008 that showed the increase in investment funds long oil had grown by about as much as Chinese physical demand grew, both in dollar terms, for the last five years or so at that point .) If the release of the reserves makes speculators take a haircut, then since the government could repeat this at any time, it adds to their risk and a risk that they cannot measure very well (unless they have inside information) so it should give them pause. But if a lot of that speculation is mainly from passive investment by funds just allocating a fixed percentage of their holdings to oil futures, then I guess it will be more complicated because it will depend on the by-laws of the funds if that risk makes them put less dollars into oil.